Monday, June 14, 2010

Attempted Midmorning Recovery Fizzles, Gold Continues Slump

Gold began regular trading with a dive, which took it down to below $1,222. Pausing and churning between that level and $1,224, the metal spiked up above $1,228 in the fifteen minutes after the stock markets opened. Perhaps because the averages continued to climb, perhaps because the spike was caused by short covering that didn't last, or perhaps because it tracked the U.S. dollar, gold reversed and sunk down to $1,220. After pausing at that level, the metal sunk further to bottom at $1,215.30. That downwards spike didn't last, and the metal rose back up to settle in a range bordered by $1,218 and $1,221. As of 11:54 AM, the spot price was $1,219.00 for a loss of $8.50 on the day. The Kitco Gold Index attributed -$22.60 to predominant selling and +$14.10 to weakness in the greenback.

The U.S. Dollar Index recovered a little early in the session, to almost 87.6, but continued sinking after 9:45. In an uneven decline, the Index was driven down below 87.2 before reversing somewhat in late morning. As of 11:56, it was 86.32.

Again, a renewal of optimism has taken its toll on gold. Although still well above $1,200, the metal has lost its Friday gains. The afternoon part of regular trading will show how much more of a toll is taken.


Update: A Moody's downgrade of Grecian sovereign debt from A3 to Ba1 gave a boost to gold, although it had already bottomed before the announcement was disseminated. The morning decline stalled around the $1,218 level, and stayed there until the rally kicked off at 12:45 PM ET. Peaking at $1,225, the metal fell back to $1,222 before sneaking up again. As of 1:30 PM ET, the end of the pit session, spot gold was at $1,223.50 for a drop of $4.00 on the day. The Kitco Gold Index assigned -$14.80's worth of change to predominant selling and +$10.80's worth to overall weakness in the greenback.

The U.S. Dollar Index also bottomed in late morning; its recovery rally was stronger than gold's. Making 86.35 by just before noon, the Index settled back into a 86.25-86.3 range. It was in the middle of that range when the Moody's news hit. The ensuing rally took the Index up to 86.6 before it settled down and slid sideways at a little above 86.5. As of 1:30, it was at 86.53.

Moody's downgrade didn't have a spectacular effect on both safety assets, suggesting that it wasn't that much of a surprise, but it did aid in reversing their declines. Gold is now well above $1,220, and is on track to ending the day with only a small loss.


Update 2: The electronic-trading hitch was more wobbly than usual, and the end loss could be pegged as more than small, but gold ended up closing in the low 1220s. After peaking again at $1,225 right after the pit session ended, the metal fell for the next hour to bottom out at a little more than $1,218. Pulling back up, it reached $1,224 by the time the equity markets closed. Moving downwards again, it bottomed this time above $1,220. A slight rise at the end put it at its closing price of $1,221.40 for a loss of $6.10 since Friday's close. The Kitco Gold Index attributed -$15.00 to predominant selling and +$8.90 to greenback weakness. Those two components sum up to the raw change on the day.

That weakness was for the day as a whole, but the U.S. Dollar Index showed some more strength in the rest of the afternoon. Peaking at around 86.7, the Index spent mid-afternoon descending to below 86.5; it reached 86.435 around 3:20 PM ET. Then reversing, it climbed at first quickly but later slowly as it reached just below 86.7 again. As of 5:30, it was at 86.68.

Its daily chart, from Stockcharts.com, shows a large decline that broke right through the 87 support level:



Although the decline was partially halted this afternoon, it was still large enough to add to the Index's current short-term downtrend. The Euro, after being pummeled until recently, is recovering; that recovery is taking its toll on the Index. Its RSI, now at a level not seen since mid-April, is just above neutral territory. The RSI line at the top of the charts has shown a similar deterioration as the Index itself in the last week. For the third day, its MACD lines are in a bearish configuration; today's is fairly substantial. Last week's switch to bullish was indeed an aberration.

The extent of this short-term decline depends upon how much of a respite the Euro is going to enjoy. Short-covering, perhaps a short squeeze, in that currency has been the main force dragging the Index down. As the Moody's downgrade shows, the Europroblems are not over. That item, however, didn't have the same oomph that it might have had when the Eurocrisis was still brewing and the Index was lower. It came close to 86.0 today, after reversing, but the level to watch is 85.5. It getting down there would signal a possible end to the bull run it's enjoyed since mid-April.

As for gold, its own daily chart shows a decline that did not erase Friday's recovery gains:



Unlike last week's, gold's fall today was not as bad as the Index's. The former's own RSI line is in similar territory as the latter's, but gold's never got to the same overbought levels that the Index's did. The metal's MACD lines, found on the bottom of the chart, are still in a bearish configuration.

That said, the metal's performance hasn't been that bad. It could have bottomed at $1,200, as it did on its last short-term downtrend, but instead it's bottomed at the $1,216-$1,218 level. Had it gone all the way down to $1,200, there would likely have been bargain hunters stepping in. So, a decline to that level is not as bad as a raw reading of the chart would indicate. Although stalled, and not showing much strength, it hasn't shown much post-May weakness in the first half of this month. The let-up in the Eurocrisis had the most damaging effect on the metal in mid-to-late May, from which it largely recovered. There may be further weakness ahead, but it's likely to be muffled by that bargain-hunting.

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